Retirement saving: the Great Divide

About half of boomers on track to meet basic retirement expenses

Only about half of boomers are saving enough to cover at least their basic retirement expenses — as are about 45% of Americans overall — but the news is even worse for younger savers, according to a new study that asked people to detail their savings habits and retirement plans.

Fifty-two percent of boomers, 41% of Generation X and 39% of Generation Y savers are on pace to meet at least basic retirement costs — including housing, health care and food. And a portion of those savers are also saving enough for discretionary items, such as travel.

But the retirement outlook for the rest of savers is “fair” or “poor,” and will require either modest or significant changes to their planned retirement lifestyle, according to the study by Fidelity Investments.

That could mean saving more, delaying retirement, working part time in retirement or spending less, among other measures. For boomers, who don’t have a lot of time left to save big sums, “The biggest lever is going to be their retirement age,” said Lauren Brouhard, a senior vice president for retirement at Fidelity Investments.

If “you can delay retirement, the more time there is to save and the less you’re going to need to make up for,” she said.

In the study, which was based on a survey of 2,265 working households, baby boomers are defined as born in 1946 through 1964, Gen X is 1965 through 1977 and Gen Y is 1978 through 1988. Survey respondents were at least 25 years old.

What will you spend?

With the study, Fidelity aimed to go beyond a much-debated rule of thumb: The one that says you’ll need 85% or so of pre-retirement income once you stop working.

This study, Brouhard said, “Works from the assumption that what people will need varies pretty widely based on the lifestyle that they intend to live.” For example, a survey respondent who plans to travel a lot in retirement needs to replace a higher percentage of pre-retirement income than one who does not.

The survey entailed asking about 100 questions, including at what age respondents expect to retire, whether they plan to work in retirement and what their likely retirement expenses would be — and those survey findings were run through Fidelity’s retirement-planning model.

Fidelity looked at what would be an appropriate retirement-income replacement rate for each respondent, and then used that to compare how they’re doing against that goal.

“It’s kind of like running about 2,200 separate retirement-income plans,” Brouhard said. Then, the results were aggregated to come up with a median retirement-readiness measure.

At the median, Americans are on track to cover just 74% of what they need in retirement.

The boomer savers at the median are doing a little better: They appear ready to cover 81% of their retirement expenses.

But the median Gen X savers are on a path to meet just 71% of their costs, and the median Gen Y saver will have enough for 62% of retirement costs — even after accounting for their longer time horizon for saving, according to the study.

For some savers, it won’t be hard to get on track. For example, adjusting the savings rate for all savers in the study to 15% of income improves the outlook, with the median saver then on track to cover 82% of retirement expenses, compared with 74%, according to Fidelity.

Similarly, adjusting the reported expected retirement age to the full retirement age (65 to 67 — the age dictated by Social Security) resulted in a median 83% coverage of retirement expenses.

Time to up the ante

More than half of Generation Y respondents are saving less than 6% of their salary, the study found.

That was “one of the somewhat concerning findings from the survey,” Brouhard said. “The good news is that Gen Y has a lot of time [to] make changes…They really need to increase their savings now.”

They also may need to adjust their thinking about retirement. On average, Gen Y respondents said they expect to retire at age 64. That assumption may need to change, she said.

Unlike this study, a separate survey in October found that 30-somethings are doing better at retirement saving than older cohorts, but that research divided the age groups differently, separating out the 20-somethings from the 30-somethings. Read: Youth beats middle age in retirement planning.

Embrace your inner cheapskate?

Of course, the question of how much of your pre-retirement income you need once you stop working is a fluid one. At least a portion of the respondents are likely to adjust their savings and spending behavior over time.

In fact, the study seems to suggest exactly that result. Said Brouhard: “The closer people get to retirement, the more they expect that they’ll work at least part-time in retirement.”

There are a number of experts who focus on ways to reduce living expenses before and in retirement, such as Jeff Yeager’s “How to Retire the Cheapskate Way.”

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